[Why&Next]More Lucrative Than Fines... Habitual Flour Cartel Firms See Operating Profit Triple

Flour and Sugar Price-Fixing Since the 1960s
Average Ramen and Bread Prices Up 7?8% Over the Past Five Years

As food companies and their former and current executives, who reaped up to 10 trillion won in illicit gains through flour and sugar price-fixing, have been indicted en masse, it has been revealed that these companies significantly boosted their profitability by raising prices. In recent years, raw material prices have surged so much that new terms like 'breadflation' and 'sugarflation' have emerged, and this spike in input costs has been passed on to food prices, increasing the burden on consumers. At the same time, food companies have been lining their pockets through collusion, fueling public criticism.

According to the food industry on the 5th, the flour price-fixing case recently prosecuted by the prosecution involved all seven member companies of the Korea Flour Mills Industrial Association. Based on each company’s disclosure data, the domestic flour market is estimated to be worth 1.3 trillion won as of 2024, and it has an oligopolistic structure in which three companies - Daehan Flour Mills, Sajo Dongawon, and CJ CheilJedang - hold a combined market share of more than 70%. Samyang (10%), Daesun Flour Mills, Samhwa Flour Mills, and Hantop each have single-digit shares.

Daehan Flour Mills' operating profit triples

According to the prosecution’s investigation, these milling companies colluded on flour prices totaling around 5.9 trillion won over a period of 5 years and 9 months, from January 2020 to October last year. Taking advantage of the surge in the price of wheat, the raw material for flour, which spiked after the outbreak of the COVID-19 pandemic triggered a global supply chain crisis and the war that began when Russia invaded Ukraine, the world’s largest exporter of agricultural products, in 2022, they sharply raised prices through collusion.

However, even after supply instability eased and wheat prices began to trend downward due to weakening demand for flour, these milling companies only slightly lowered their supply prices. As a result, their business performance improved steeply. For example, Daehan Flour Mills, the largest flour manufacturer in Korea, recorded flour sales that had only slightly exceeded 300 billion won up to 2020, but these rose to 346 billion won in 2021, 460 billion won in 2022, and 490 billion won in 2023. Although sales have since edged down, cumulative sales up to the third quarter of last year reached 346.4 billion won, exceeding the annual sales level before the flour price-fixing.

The company’s operating profit growth has been even steeper. Daehan Flour Mills’ operating profit rose from 7.4 billion won in 2019 to the 15 billion won range in 2020, the first year of the flour price-fixing, surpassed 20 billion won in 2022, and then jumped to 37.9 billion won in 2023 and 47.9 billion won in 2024. Cumulative operating profit up to the third quarter of last year stood at 28.9 billion won.

Sajo Dongawon shows a similar pattern. The company’s sales surged from 280 billion won in 2020 to the 440 billion won range in 2024. Sajo Dongawon does not disclose the operating profit and loss of its flour milling division separately, but its overall operating profit jumped from 16 billion won to 50 billion won during this period. Given that the feed division’s net profit has frequently been in the red, it appears that profitability was significantly improved by the flour price-fixing. CJ CheilJedang and Samyang do not disclose their milling performance separately. In addition, former loss-making company Hantop turned to profit, while Daesun Flour Mills and Samhwa Flour Mills also posted soaring results.

This is not the first time suspicions have been raised about flour price-fixing in the milling industry. Domestic flour companies were first caught colluding on prices in 1963, and in 2006, seven milling companies were again found to have engaged in collusion and were collectively fined 43.417 billion won by the Korea Fair Trade Commission. The Fair Trade Commission imposes fines in the range of 0.5% to 20% of sales directly or indirectly related to the collusion, depending on the seriousness of the violation. Since the profits earned from collusion far exceed the fines, it is said that habitual collusion has taken place.

Sugar prices up by as much as 66%... Successive hikes in ramen and bread prices

On the 2nd at the Seoul High Prosecutors' Office in Seocho-gu, Seoul, Na Heeseok, Chief Prosecutor of the Fair Trade Investigation Division at the Seoul Central District Prosecutors' Office, is announcing the results of a focused probe into offenders disrupting the everyday economy. Yonhap News

The sugar price-fixing issue surfaced in the 1990s. Three domestic sugar refiners - CJ CheilJedang, Samyang, and Daehan Sugar - were found to have colluded on shipment volumes and prices from 1991 to 2005, and in 2007 the Fair Trade Commission imposed a total fine of 51.1 billion won. In 2011, suspicions of collusion were raised again when the three sugar refiners raised prices in a similar fashion, and last year, after signs of organized collusion were detected, former executives of CJ CheilJedang and others were arrested.

The three sugar refiners were found to have engaged in price-fixing worth 3.27 trillion won from March 2021 to April last year. Prosecutors said that while the price of raw sugar, the raw material for refined sugar, rose from 386 won in January 2021 to 801 won in October 2023, these companies quickly raised the sugar price from 720 won to 1,200 won. However, when the raw sugar price fell to 578 won as of April last year, they only slightly lowered the sugar price from 1,200 won to 1,120 won, meaning consumers did not benefit and the three sugar refiners pocketed the gains.

In fact, during the period when these companies were engaged in collusion, flour prices rose by up to 42.4%, and sugar prices rose by up to 66.7%. As raw material prices increased in this way, the prices of finished products climbed in tandem.

From January 2020, when the flour and sugar price-fixing was underway, food manufacturers directly hit by the hikes in input costs raised their product prices one after another. Ottogi raised its prices by 11.9% in August 2021, 11% in September 2022, and 7.5% in April last year. Samyang Foods also raised prices by about 6.9% in September 2021 and 9.7% in November 2022. Nongshim raised prices by 6.8% in August 2021, 11.3% in September 2022, and 7.2% last year.

Paris Baguette’s bread prices were raised by 5.6% in February 2021, 6.7% in February 2022, 6.6% in February 2023, and 5.9% in February last year. During the period when sugar price-fixing was taking place, Lotte Chilsung Beverage raised prices on six products by 6.9% in June last year, and hy’s fermented milk products saw an average price increase of 16.3%.

In legal circles, some analysts say it would be possible for food manufacturers to file damages suits and other legal actions on the grounds of harm caused by raw material price-fixing. However, the prevailing view is that it will not be easy for food companies, which must continue to procure raw materials, to bring lawsuits against flour milling and sugar refining companies. In the end, it appears that only recoupment of unjust gains through Fair Trade Commission fines and related measures will be feasible.

A food industry official said, "When flour and sugar prices go up, food prices have no other choice but to rise, and even if raw material suppliers engaged in price-fixing, it is impossible for food manufacturers to file lawsuits," adding, "I do not think any food company is preparing or planning to sue."